Reform

Remarks of Under Secretary Eric L. Hirschhorn as Prepared for Delivery at the BIS Update Conference July 23, 2013

U.S. Department of Commerce Bureau of Industry and Security

Update 2013 Conference

Remarks of Eric L. Hirschhorn Under Secretary for Industry and Security

July 23, 2013

Thank you, Dan. Thanks to Bernie Kritzer, Rebecca Joyce, Toni Jackson and our terrific Outreach staff as well as the many BIS and U.S. Government colleagues who have contributed to this conference. Bernie is retiring soon, so this will be the last Update conference for which he’s responsible. Please give him a big hand.

To the staff of BIS, thank you again for your diligence, professionalism, and dedication. I’d also like to thank my colleagues from the other departments involved in export controls. As evidenced by our amazing progress in the reform effort, great things happen when we can see ourselves as part of an Executive branch with a single vision. It is an honor to work with all of you to advance our country’s national security, foreign policy, and economic security.

I would like to introduce our BIS management team. Please stand when I call your name. Please hold your applause until I have read everyone’s name. We have Assistant Secretaries David Mills and Kevin Wolf, Deputy Under Secretary Dan Hill, Chief of Staff Sharon Yanagi, Deputy Assistant Secretaries Matt Borman and Rich Majauskas—Rich will come aboard next week—Director of Administration and CFO Gay Shrum, Director of Congressional and Public Affairs Charles Kinney, and Chief Information Officer Eddie Donnell. And thanks to OEE Director Doug Hassebrock for serving as Acting Deputy Assistant Secretary for Export Enforcement for the past few months.

I. Export Control Reform (ECR) Generally

We have been describing for nearly four years why our national security requires fundamental reform of our export control system – to increase interoperability with our NATO and other close allies, to strengthen the defense industrial base by reducing the incentives of foreign companies to design out or avoid U.S.-origin content, and to focus our resources on the transactions that matter most.

To implement these objectives, the regulations must change considerably. Over the next three days, we will be describing the fundamental changes that have been completed and those that are yet to come. We are yours for these three days. Ask questions, so that you leave here as informed as possible—not only about what is changing but also what is not. If you think of a question after the conference, that’s okay, too. Keep asking. Our accessibility to the public and our ability to explain the changes to those affected is essential to our success.

We know that change is hard. But we believe that once you understand and implement these changes, the system will be more efficient for you. It will also achieve our national security, foreign policy, and economic security objectives.

Another reason to keep asking questions is to help us spot things that we may have missed. With any regulatory reform effort as large as this, small mistakes and unintended consequences are inevitable. You can help by pointing out any seemingly odd results from your application of the regulations in the day-to-day business of exporting. They may be deliberate, or not.

We have strived to make the reform effort transparent. The government, of course, makes the final calls on what is in our national security and foreign policy interests, but we have been doing so with significant input from industry. We want our rules to be as reliable and predictable as possible so that you can be reliable and predictable exporters. This is good for our national security and foreign policy objectives, and for your ability to comply with the rules and to profit from secure, efficient, and lawful trade.

A central part of the reform initiative is the Defense Department-led effort, in which State and Commerce also played important roles, to revise the U.S. Munitions List so that its categories are more specific and list only those defense articles that are critical to maintaining a military or intelligence advantage or that otherwise warrant the types of controls in the ITAR. Military items that do not warrant ITAR controls will become subject to the EAR and its new "600 series" controls.

We will go into more detail on these new rules during the conference, but one way of thinking about them is that we have divided the world into three main groups –the 36 NATO and other close allies that will become eligible to receive military items subject to the EAR under License Exception Strategic Trade Authorization, or STA, the countries subject to arms embargoes, and all other countries. The greatest benefit will accrue for exports to and among the first group but there also will be significant benefits for the third group. The rules for the embargoed group will not change, even for items being transferred to the CCL.

II. Status of the ECR Effort

Export controls are serious, with serious implications that warrant careful action. Ours are ambitious ideas. Unlike previous Update conferences, however, they are now more than just ideas because we are issuing them as actual, final regulations.

In particular, on April 16th, State and Commerce published final rules revising the controls on military aircraft and engines, and related items. The most significant changes are with respect to most parts and components for military aircraft and engines.

The rule also includes many new or revised definitions and exceptions in order to begin the process of harmonizing the EAR and the ITAR. One such definition is "specially designed," which will result in increased clarity, reliability, and predictability for exporters without over-controlling—or under-controlling—items that meet the regulatory criteria. At the request of industry, the April 16th regulations include a 180-day delay in the effective date (until October 15) to allow companies to adjust their internal order processing and compliance programs.

On July 8th, State and Commerce published their second set of final rules, which included significant changes to the controls on the parts and components for military vehicles, ships, and items in the ITAR’s miscellaneous and materials category. These rules will become effective on January 6, 2014.

This Thursday—July 25—State and Commerce will publish a second proposed revision to the controls on military electronics. The document will be on public display at the Office of the Federal Register tomorrow and the deadline for comments will be September 9th. We are publishing a second proposed rule because many of the comments to the first proposed rule provided hard evidence supporting changes—and the changes are significant. We wanted to give industry a chance to see and comment on the changes before they became final. This is an excellent example of what I meant by the transparency of the effort and our goal of involving industry in ensuring that the control text is understandable and consistent with the goals of the reform initiative.

In early January, President Obama signed this year’s National Defense Authorization Act, which restored his authority to determine the appropriate export controls for satellites and related items. We owe thanks to those in the Congress—from both parties—who made this possible. On May 24th, Commerce and State published proposed rules regarding the transfer of communications and other non-military satellites and related items back to the EAR. Thank you also to those who sent in comments by the July 8th deadline. We’ve begun reviewing them and hope to have a draft final rule ready soon so that we can begin the required congressional notification process.

We expect to begin this fall the notification process on the categories pertaining to missiles, explosives, training equipment, and personal protective equipment. We also plan to have out for public comment this fall proposed rules on the fire control and biologics categories.

III. Compliance and Enforcement

Another aspect of the reform effort is the enhancement of the export control compliance and enforcement capabilities of BIS in particular and the government in general. We have, for example, established the Information Triage Unit (ITU) and Export Enforcement Coordination Center (E2C2). The ITU compiles, coordinates and reports intelligence and other information about foreign parties, which facilitates our review of license applications. The E2C2 improves interagency export enforcement coordination by ensuring the various agencies are talking to one another and sharing relevant information.

We are also strengthening our end-use check program. For example, BIS and State are working to coordinate end-use checks where U.S. Munitions List and CCL items are co-located, so that we can expand the total number of end-use checks while minimizing burdens on your foreign customers from multiple checks.

BIS is employing a layered approach to verify compliance with license exception STA. We review data reported in the Automated Export System to track STA shipments and identify users of STA. Exporters and consignees are required to provide, upon request, copies of their export activity pertaining to STA. We have conducted a number of on-site document reviews to verify compliance. To date, compliance with the provisions of STA is approaching ninety percent. We will continue to review STA transactions to guard against misuse.

We are working on a rule that would strengthen the Unverified List to increase U.S. Government visibility into potential transactions when BIS has been unable to verify the suitability of the potential recipients. This will give you more clarity on how to address "red flags" in transactions with foreign parties for which BIS has been unable to complete an end-use check. When coupled with our other unique administrative authorities, including the Entity List, BIS’s compliance tools provide exporters with information about the reliability of foreign parties to safeguard transactions from illicit diversion.

IV. Next Steps

So what do we hope to accomplish by the time of next year’s Update conference? First, we need to complete our work on the USML-CCL revisions. As the new categories start to come on line, we need to ensure that the new licensing system and personnel are functioning smoothly.

Our new Munitions Control Division will be handling the license applications, classification requests, and other matters that will become BIS’s responsibility. It is staffed and trained, and I have every confidence that it will manage the new system successfully. If not, I’m sure you will let us know. By the way, a majority of the new hires have Department of Defense backgrounds, with almost one-third being combat veterans of Iraq or Afghanistan. They have direct, hands-on experience with military equipment and DOD programs.

Beyond the USML-CCL list review efforts, we need to keep working on making the EAR and the rest of the CCL clearer and easier to use. A control list comprising the details of multilateral regime commitments and various unilateral controls necessarily is complex. We nevertheless will do what we can to make it internally consistent and easier to apply. We also will continue the work of harmonizing the definitions of key ITAR and EAR terms.

Working through the regime process, we will continue evaluating the strategic rationales for the controls on specific dual-use items. The multilateral regimes can only handle a limited number of proposals each year but we will move as quickly as we can.

We want to revise and simplify encryption controls by making them more concise and clear, and not increasing the regulatory burden unduly. I do not yet have a solution but we are working on the issue.

We are drafting a proposed rule that would update existing support document requirements and clarify routed transaction issues. We plan to seek public input on how to revise the current recordkeeping requirements to be consistent with modern IT and document retention systems.

This is not a complete list of the EAR changes we’re contemplating but it offers a feel for the types of developments we’d like to be discussing at this time next year.

V. Education

Since joining BIS, I have stressed the need for education and outreach, particularly for small- and medium-sized companies. The benefits of our improvements will be lost unless the regulated community can understand and comply with them. We are working hard to get the word out. We have, for example, developed partnerships with non-profit educational groups representing defense exporters, particularly small and medium-sized firms. Notwithstanding fiscal austerity, BIS has conducted this year more than 140 reform-related activities that have reached about 11,000 people. These include weekly teleconferences, which provide an important venue for industry to submit questions on what has been proposed and how the new system will work.

If you are a regular visitor to the BIS website, and I hope that you are, you’ll notice that we’ve completed the transition to our redesigned website. Our goal was to provide quick and easy access to the information you need to stay current with bureau activities and tools to make your compliance responsibilities easier. We welcome your comments on our new format.

We have deployed on the BIS website two interactive tools to assist exporters in understanding and complying with the new rules: the Commerce Control List Order of Review Decision Tool and the "Specially Designed" Decision Tool. We will be updating the on-line interactive STA tool to assist companies in determining whether they are eligible for and compliant with STA to take into account the "600 series." Additionally, we are in the beta testing phase for a fourth interactive tool that will assist the private sector, academic, and research communities in determining whether a deemed export license is required.

We conduct seminars, webinars, and teleconferences on the new rules. These webinars are recorded and made available without charge on the BIS website.

BIS does not limit its outreach and education to the private sector. We’re also helping other government agencies with the transition.

Over the next few months, BIS will be working closely with the Outbound Branch of U.S. Customs and Border Protection to implement a port training program, and with the FBI and DHS’s Homeland Security Investigations. We don’t want our law enforcement partners to be surprised when they see a defense part or component exported under a BIS license or license exception instead of an ITAR license.

We also are working with the Small Business Administration and Commerce’s Minority Business Development Administration to get the word to the companies with which they deal.

VI. Conclusion

Another important aspect of our training and outreach efforts is this conference. Please take advantage of it. Ask questions. Challenge us. Learn. Enjoy yourself. Thank you for attending.

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Let me now take just a few more moments of your time to introduce the next speaker. The centerpiece of this conference, as its theme implies, is President Obama’s export control reform initiative. Many people, in BIS and a host of other agencies, have played a role in bringing ECR about. Kevin Wolf, our Assistant Secretary for Export Administration, has been in every sense the mainstay of the BIS team in this effort. Without his energy, commitment, knowledge of the ITAR and the EAR, ability to "play well with others," and sense of humor, ECR could not have gotten to first base, let alone be rounding third and heading for home.

Kevin is a native of the Show-Me State, Missouri, and received his bachelor’s degree from its state university. He then made his way and earned his law degree and a masters in International Affairs from the University of Minnesota. Then, on to Washington, where he spent seventeen years with the Bryan Cave law firm, much of it working on export control and other international issues, before yielding to the siren call of government service in early 2010.

It’s a privilege to have him at BIS and to hear from him this morning. Please welcome Assistant Secretary Kevin Wolf.